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Transparent collusion of Russian monopolists

Transparent collusion of Russian monopolists

20.09.2011 — Analysis

The RF Federal Antimonopoly Service (FAS) has initiated the first lawsuit over collusion in electronic bidding related to municipal orders. Yet, officials have not been discouraged, arguing that the bidding process is becoming more and more transparent in the country, while competition is becoming increasingly intense. In the meantime, experts have informed the RusBusinessNews columnist that the corruption in purchasing is not declining, and monopolist practices are gaining strength. It would be naive to expect any different situation in the context of total criminalization of the Russian economy and non-existing freedom of entrepreneurship.

Yet, the RF FAS officials, having found out the entrepreneurs' collusion, think that electronic bidding offers excellent opportunities for fair competition when holding auctions. By introducing a new form of government order placement in 2010, the antimonopoly authority hoped that the virtual trading marketplace will be able to prevent any risk of collusion between participants due to absence of physical contacts.

Igor Artemiev, head of the antimonopoly service, is sure that the innovation has justified the expectations. In his report presented at the meeting of the Russian government, he stated that the number of economic entities is increasing in the country, while the monopolists' contribution to the economy is shrinking. The official pointed out that more than half of entrepreneurs give positive assessment to the Russian competitive environment.

The optimistic opinion of I. Artemiev is not supported by participants of auctions. They do not see any sweeping changes caused by electronic bidding. The main problem is still unsolved - the structure of the market where the manufacturers' areas of influence are distributed has remained unchanged.

Nikita Baranov, Deputy General Director of SKB Kontur (Special Design Bureau), says that 80% of the suppliers who entered electronic trading had already participated and won in auctions. The competition has not become more intense, as there are 1.5-2 suppliers per each declared lot, though there must be at least 5-6 suppliers. Business has still no confidence in the government and is not interested in participation in bidding, being sure that contracts will be awarded to the "wanted" company.

Suppliers and customers are still able to manipulate auction results; electronic bidding has not brought any discomfort. Participants say that they can easily identify the manufacturers by the bill of goods, thus being able to contact him in person. In small towns there are very few suppliers, and municipal orders can be distributed well ahead of bidding. According to the rumors spread around the market, there are people who offer to disclose, for remuneration, detailed information about participants of the bids. They say that in some particular situations there is special equipment that is used to dampen competitive offers and block competitors off the participation in bidding.

Technical failures are quite frequent at trading sites, thus making it easier for officials to sign contracts with the suppliers they are interested in. For example, the Sverdlovsk Regional Ministry of Health has refrained from holding auctions for a long time, justifying its abstention by unavailability of the Internet access.

On the other hand, auctions can be totally avoided by splitting large orders and lawfully requesting suppliers for their quotations. Andrei Chernogorov, the first deputy general director of the Single Electronic Trading Platform, OJSC, says that about 12% of the auctions are declared as not having taken place (thus, assuming automatically purchasing of goods without any competition). The reasons are often rooted in inadequate requirements of customers: For example, some sophisticated hardware must be delivered tomorrow. A. Chernogorov assures that corruption has not disappeared - it has just moved from bids to the stage of documents preparation. There can be a situation when the work under the contract is totally different from the term and conditions agreed upon its signing.

Dmitry Tikhonov, General Director of Medfarmservis T, LLC, points out that no government authority supervises performance of contracts; therefore, bidding documents can be very different. Electronic bids have demonstrated that prices for inexpensive medical commodities are intentionally marked down, thus, shutting off a number of suppliers, while expensive commodities are additionally overpriced, resulting in "splitting" budget funds.

Experts think that the trading sites are not as important as the contents of documentation prepared by customers. That is where one can see officials' "ears", as officials decide on commodities required by government entities. Everything must be just the opposite: The official must specify the need he wants to meet rather than what goods he needs. Then there will be additional suppliers having unconventional offers that will yield an economic effect. There is nothing of the kind at present: today's hospitals are black holes. Frequently, customers require the equipment without disclosing its characteristics to the public. It is a loophole to buy an expensive product for the relevant kickback. As a result, funds are disbursed, while equipment of hospitals is at the former levels.

D. Tikhonov suggests that each customer should have a government order certificate, which will specify the main parameters of an institution: the number of employees, existing equipment, its utilization rate, needs in new equipment, expenses on supplies and fixed assets. Then, hospitals that are similar in size can be compared in terms of efficient expenditure of budget funds, while chief medical officers can be asked embarrassing questions about the purchased equipment.

N. Baranov is sure that the purchasing process must be more difficult. All around the world many mathematicians are working on algorithms, due to which suppliers will be able to quote their optimum prices. It turned out to be very important for a country's development. The government, which skimps on purchases and does not support economy (the government order is always big money), eventually loses its competitiveness. For example, the USA yields Europe in 3G high-speed mobile communications only because the auction winner offered the lowest possible price. In their frequency management, Europeans relied on the optimum price, thus paving the way for triumphant deployment of the new technology.

According to the expert, the most important task is to increase the number of market players: The larger number of suppliers will lead to reduction in collusions. The true competition among sellers can influence the preparation of bids. With process transparency that undoubtedly increased due to electronic bidding, complaints about the improperly prepared bid will bring results.

However, Dmitry Tikhonov does not expect that the number of suppliers will increase. According to him, if large companies used to buy electronic trading sites, today they are forming pools of customers that prepare bids based on the interests of particular manufacturers. In fact, the market is going through its further monopolization and increasing corruption. It must be typical of the country where officials split their appointments, having their second jobs in big business.

Vladimir Terletsky

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